Thursday, January 06, 2011

General Motors (NYSE:GM): Could be worth $100 per share? - Morgan Stanley

Morgan Stanley is pressing their bet in General Motors (NYSE:GM) with a very bullish 21 pg. note saying thestock could be worth $100 per share.

Re-In-Car-Nation: The Path to $10 EPS and $71bn Cash

Could GM be one of the most cash generative manufacturers in the world? The irony defies business precedent. Little more than 18 months after the company’s reincarnation through section 363 of the US Bankruptcy Code, GM’s current financial prospects appear to be on par with the strongest in the global auto industry.

Morgan Stanley forecasts GM to generate 100% of its market cap in cash over the next 5 years. The confluence of cyclical recovery in N. America (where GM derives two-thirds of its cash flow) and secular growth in emerging markets (the rest of its cash flow) drives their estimate for GM’s net cash to improve from $19bn at the end of 2010 to $29bn by 2012 and $71bn by 2015.

EPS boosted by above-cycle earnings and depressed tax rate. Firm's FY 2011 earnings forecast of $6.25 is nearly 60% above consensus expectations. Their 2012 EPS forecast of $7.58 is more than 50% above consensus. They forecast GM EPS to peak at $9.61 in 2015 before normalizing at $4.21 on fully taxed basis excluding any pension income benefits.

Consensus expectations for 4Q results appear far too low in firm's view. Morgan Stanley notes their forecasting abilities will be tested in 4Q where their $0.93 EPS estimate is nearly 2x consensus at $0.50. They anticipate consensus will have to revisit their GM numbers throughout the first half of 2011.

Improved execution on the top line could trigger far higher valuation: Morgan Stanley's $50 price target is based on GM being a relevant ‘global player’ in the industry, but only keeping up with a cyclical recovery in the US light vehicle market while riding secular growth in emerging markets. With the historic impediments on costs substantially eliminated, the firm sees no structural reason why GM cannot one day be a dominating force in the global auto industry. While it’s too early to give the company the benefit of the doubt, they believe GM has the potential to one day produce the earnings and cash flow required to justify a valuation closer to $100 than $50.

Notablecalls: Well, this should create some buy interest. The stock is on a roll and with Morgan Stanley calling for a huge Q4 beat, I see little reason for it NOT to go up in the n-t.

The $100 per share comment is there to create attention. And attention it will create.